Dollarisation could severely hurt industry

THE country’s biggest industrial lobby group, Confederation of Zimbabwe Industries (CZI), says full dollarisation of the economy will only benefit consumers, as doing so will come at a huge cost for local industry.

The CZI said such a move would reverse all the gains achieved in the past year during which production increased significantly on improved access to forex.

According to the industry lobby body, local capacity utilisation improved in 2021 on the back of enhanced access to foreign currency following the launch of the auction system. Subsequently, output also increased by 30 percent while volumes sold jumped 32 percent during the year in line with the enhanced capacity.

CZI chief economist, Cornelius Dube, however said the economy risked retrogression if Zimbabwe dollarised. Ditching the local currency in favour of the US dollar has the most damaging implications on the economy, growth and job creation.

“Dollarisation is not good for industry, if we have a very strong currency, it becomes difficult to operate. We become uncompetitive on regional markets as our products will be pricier. We will end up becoming a supermarket economy where traders from other countries will bring in their products, then enjoy exchange rate gains back in their countries, which is not good for us.

“Dollarisation is only good for the consumers and employees, but has drastic effects on local industry, it will hurt businesses,” he said responding to questions at the recently held virtual Engineering Iron and Steel Association of Zimbabwe (EISAZ) business and leadership conference last week.

This comes as some sectors of the society have been piling pressure on authorities to fully dollarise the economy to stabilise the exchange and stem out run-away inflation.

For consumers, dollarisation means stability in their purchasing power, savings and ability to plan. Since the beginning of the year, the local currency has been losing value. It now trades around $165 to the US dollar on the RBZ weekly auction market and circa $350 to $400 on the parallel market.

As a result, retailers, transport operators and landlords have resorted to pegging their prices in US dollars to cushion themselves from inflationary pressures.

But Dube highlighted that a fully dollarised economy would result in an unsustainable cost structure for businesses, which will eventually result in low capacity utilisation, low production and job cuts, subsequently affecting the consumers.

He, however, called on monetary authorities to strengthen the local currency and restore confidence.

“What is needed is for the monetary authorities to find ways of rebuilding confidence in our local currency,” he said.

At the end of 2021, the Government announced measures aimed at promoting the wider use of the local currency. Exporters would pay up to 40 percent of their taxes in local currency, miners would pay 50 percent of royalties in local currency while 50 percent of vehicle import duty would be payable in local currency. Additionally, payment of fuel at designated service stations would also be made in local currency.

However, the Government also created currency discord on the market after it also announced that a chunk of civil service salaries would be paid in US dollars, putting pressure on wage demands in the private sector to follow suit, in an act of lack of confidence in the local currency, which further fueled inflation. Some companies that failed to raise US dollar salaries for workers also increased the amounts in local unit. But the Government also talked about strategies to tame inflation, although 2021 targets were missed, further adding a strain on the 2022 economic prospects and projections of 5,5 percent GDP growth.

The missing of inflation targets underlines that the year 2022 inherited an inflation challenge, which requires bold and decisive policy action to be tamed, according to CZI. Thus, the extent to which new measures on inflation will be undertaken in 2022 would be instrumental in defining the success of the authorities to control it.

Dube said chances were high that the annual rate of inflation for the month of May was already within the three-digit range, and consumer spending would diminish, reducing appetite for locally produced goods, thus reversing gains achieved in 2021, where total output and sales volumes recorded double digit growth.

According to CZI, the year 2022 already started on a bad note as the world witnessed a spike in prices, which was mainly a result of the effects of the Covid-19 and its variants, which created supply shocks.

Reluctantly, this limited output created excess demand, resulting in high prices, causing pressure for wage rises, which in turn further increased product prices.

Price hikes were recorded in the food and drink, tech equipment, tourism and travel, construction materials, industrial services, commercial and professional services, as well as pharmaceuticals.